This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in Business & Finance.

There are 18 references cited in this article, which can be found at the bottom of the page.

Projecting sales can be the most difficult part of writing a business plan. However, it is also one of the most important. You'll need sales figures to estimate how much working capital you'll need in the first months and years you are up and running. In addition, forecasted sales figures can help you get a business loan, assuming they are reasonable and backed by fact. Use the following steps to forecast sales before starting a business.

Steps

Part 1

Conducting Research

1

Identify likely customers. Work to define a market for your product or service. Who do you expect will have the desire and the money to purchase it? Using demographic information, define the characteristics of your likely customers. Demographic characteristics include age, sex, marital status, income, children, and other characteristics as you see fit. The more you know about your customers, the more likely your projections of sales will be correct.[1]

2

Define your market area. Decide where your customer are likely to come from. Use that to make a geographic determination of your market area, which represents the primary area your business will serve. This will vary between business types and areas. For example, an online business might draw across the US, but have considerable marketing costs and competition, while a local fast food restaurant might draw in a 5-mile radius around location.

Finding your market area will help you identify data relevant to your sales forecast, like demographic and competitor information.

3

Review competitor and industry data. If you are starting a business in a field you have expertise in or knowledge of, start with that to determine your sales figures and price information. Even if you don't personally know this information, try talking to an industry contact who might be knowledgable. If you don't know much about the industry, try consulting with an accountant who is experienced in your industry and/or startups. This person can also help with financial projections.[2]

If you are unable to get any of these sources as a guide, try researching similar product or business launches. For example, if you are selling a piece of sports equipment, try look at similar launches of sports equipment in your specific sport and area.[3]

You can also investigate competitors the old-fashioned way: personal observation. If there is a similar or competitive product being offered close by, visit the location and do a visual survey and customer count.

4

Obtain information from the Bureau of Labor Statistics (BLS). The BLS is a great source of industry information that you can use to estimate demand. Visit their website and look for documents that give you information specific to your products. Start with the most recent Consumer Expenditures report. Then, look at the "industries at a glance" section on the site. Finally, look at the Producer Price index. This will give a look at how stable prices are in your industry.[4]

5

Investigate trade publications. Visit your library or search online to find trade associations and publications relevant to your industry. They will include sales figures relevant to your business, sometimes even broken into specific regions and products. However, you may have to pay for this information, so take that into consideration.

Trade associations also work to get and keep you in business, so take advantage of any other resources they offer.[5]

6

Look for Census data. Visit the US Census website or your library to find census information in your area. You'll be able to locate specifics about the population, like income levels, household size, and ages. This information will be critical when evaluating the potential market for your product. The Census report may also contain sales information for business types in your area. Use this information if you find it, but be sure that it is up to date. If not, you will have to project the values for the current date based on historical growth.[6]

7

Talk to potential vendors. Vendors, who sell you your inventory or supplies, probably also sell to your competitors. Try talking to them to get sales data for new companies that they have supplied. You can also talk to warehouses if your industry has high inventory volume. When getting information from these sources, make sure it is backed up with actual data. Otherwise, they must just be telling you a number so you'll buy.[7]

Part 2

Predicting Sales Figures

1

Determine a unit for calculating sales. Most businesses have sales that can be measured in units. These can be the number of products sold, number of hours billed to clients, or some other measurement of individual products or services that represent a single sale to a customer. For example, a pizza restaurant might measure sales in pies or slices. Figuring out a unit that can be used to measure one sale is useful for calculating sales volume.[8]

2

Forecast price per unit. Use market information to estimate several price points at which you might sell your product. Look at competitor's prices and adjust them to fit your product. For example, if your product is marketed as higher quality, your goal might be to sell it for a higher price to match. If you are selling multiple products, be sure to estimate prices for each. Make separate projected prices for the ideal price that you want and a worst-case scenario price. This will inform your high and low sales projections later.[9]

3

Estimate sales frequency. Another key metric of forecasting sales is repeat business. Estimate how many times per year the average customer might need your product. For example, if you owned a grocery store, you might expect customers to return weekly. However, if you are starting a mattress store, you might only expect your customers to return once every few years.[10]

4

Determine market size. Your market size is your total revenue that can be produced by the number of potential customers in your market area. Calculate it by first multiplying number of projected customers in the defined market area by their frequency of purchase. Then, multiply this figure by the projected number of units sold in a specific time period. Finally, multiply that times the price of an average unit. The result is the total market that is possible to be captured.

5

Estimate a projected market share. Once you've gotten your target market, you'll need to analyze your competition to determine how much of that market you can control. Again, this figure is an estimate, so talk to industry contacts and do your research to find out what numbers to expect. Remember that your market share will start low and then (hopefully) increase over the years.[11]

Try to estimate what piece of the larger market you will get by looking at sales figures for similar businesses in their first years of operation. Compare that data to the overall market size in that year to get their market shares. Then, average this data to get an idea of what market share you can expect.[12]

6

Calculate likely sales per time period. To forecast your sales, start with your projected number of customers. Then, multiply this number by the number of repeat purchases you expect each customer to make annually. Finally, multiply this by your per-unit price. The result is your sales forecast for one year.[13]

So, if you expected to have 2,000 customers, who returned on average twice per year, and your product costs $20, your projection would be 2000*2*$20, or $80,000.

7

Create high and low estimates. Make separate sales forecasts that take into account different possibilities. Focus on creating a pessimistic, or low, projection and an optimistic, or high, projection. Your pessimistic projection might include a lower sales price, slow market acceptance, and slower repeat business. Your optimistic projection should be the opposite, with higher than expected sales, quick market acceptance, and regular repeat business. The reality of your sales forecast is likely somewhere between those two extremes, so calculate them first and work from there.[14]

8

Project annual growth. Use the same tactics that you used above to extend your financial projections out to three years. This is the amount suggested for a business plan. Estimate your growth each year based on similar businesses and industry information. Again, make separate projections for high and low amounts of growth. You may also be able to project for a price increase after a few years. However, make sure that your growth projections are based in reality. Don't guess at high growth rates without any precedent to back them up.[15]

Remember to take inflation rates into account when projecting your sales growth. You can expect your prices to roughly roughly in accordance with national inflation rates.

You should also consider competitors reactions to new entrants in the market. Markets with a small number of large players may be able to manipulate prices or other market conditions to push out new entrants.

Markets that have easy entry requirements are generally very competitive so it is hard to increase or maintain growth without a specific advantage that is difficult to duplicate.

9

Confirm projections by other approaches. If your sales cannot be easily broken down into units, there are other methods you can use to project sales. These methods still use industry averages to calculate annual sales, but do so using strategies more applicable to the industry. For example, a restaurant might project sales by multiplying the average number of occupied tables by the average revenue per table. For accuracy, this is sometimes split up into different meals or times of day.

Alternately, a retail store might project sales by locating industry data on average sales per square foot then multiplying that by their own square footage.[16]

For another example, a web store might project sales by estimating web traffic and finding data for average conversion rates (how often visitors to a site buy the product). This data could then be used to estimate sales volume.[17]

Video.

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Tips

Try to get as much information as possible, by surveys or data available

Be realistic about what product or service are you offering to the market

It is very important to take into consideration the price you are charging for your product, that’s what drives most of the clients' interests.

Make sure your estimates are realistic. Get comparable scenarios or historical data to do so, or make a best case and a worst-case scenario if your estimation can considerably change the result of your forecast.

You can continue to the next step of a creating a sales pro forma by predicting expenses. This will help you to calculate an important sales metric, your gross margin.

Gross margin is the difference between your revenue and the cost of goods sold (what you pay the buy the items you sell). Note that cost of goods sold does not include other costs like marketing or administrative costs, just the cost of the actual product or service itself.

Estimate your per unit cost then multiply it by the number of units to get cost of goods sold.[18]

Warnings

In sales forecasts, be aware that it is always safer to underestimate than to overestimate.